Italy's president launches talks to solve political crisis

Giuseppe Conte resigned as Italian premier after lashing out at his deputy PM Matteo Salvini

Italy's president concluded a first day of crisis talks on Wednesday in a bid to form a new coalition government as a proposed alliance between the anti-establishment Five Star Movement and opposition centre-left Democratic Party appeared to gain traction.

President Sergio Mattarella met political figures, including the leaders of both houses of parliament, following the resignation of Prime Minister Giuseppe Conte and the disintegration of Italy's anti-immigrant government.

He will meet the main party chiefs on Thursday.

Political manoeuvring to form a new coalition has already started with Democratic Party (PD) leader Nicola Zingaretti saying his members were "united" in making a deal with Five Star (M5S).

Mattarella is exploring whether a stable coalition is possible.

If not he will consider a short-term technocratic government or a snap election, just 14 months after Conte took the helm of the doomed alliance between the far-right League and M5S.

Conte quit on Tuesday after lashing out at Interior Minister Matteo Salvini, who tried to bring down the government to force a snap election and take advantage of a surge in popularity for his League party.

- 'Dark clouds' -

The move left the eurozone's third largest economy in a political vacuum following a year of nationalist, populist government which angered many other European leaders with its demonisation of migrants and attempts to flout EU budget rules.

Investors appeared to believe the crisis would be short-lived with the much watched spread -- the gap between German and Italian bond yields -- shrinking, indicating the markets do not perceive significant risk at this stage.

"If they manage to form a new government, it would be welcomed with some caution by other EU leaders who might see it as an opportunity to avoid a showdown over Italy's budget in the next few months," said the director of Future Europe Initiative, Benjamin Haddad.

Italy needs to approve a budget in the next few months or could face an automatic rise in value-added tax that would hit the least well-off families the hardest and likely plunge the country into recession.

Although the PD and M5S have been at each other's throats for years, an alliance would see Salvini kicked out of government -- a powerful motive for compromise.

After a PD party meeting on Wednesday, leader Zingaretti said lawmakers would form an alliance dependent on five conditions.

They include a radical shift in Italy's zero-tolerance policy on migrants crossing the Mediterranean, pro-European policies and a focus on improving living standards.

The PD wants to work with M5S to deliver "a shareable, achievable program by a large parliamentary majority," Zingaretti said.

He later told "La 7" television he was also against the idea of Conte staying on as prime minister.

M5S would like Conte to remain in place but did not give much away, saying it would "wait for the end of consultations".

- 'Back to Europe' -

Italy's economy has been caught in a slow or no-growth trap throughout this century.

The country's debt ratio -- 132 percent of gross domestic product -- is the second-biggest in the eurozone after Greece, and youth unemployment is currently above 30 percent.

In a bid to get a PD-M5S alliance off the ground -- a grouping previously almost unthinkable -- former PD premier Matteo Renzi has said he will not participate.

Many in the anti-establishment M5S view him as elitist.

"Populists are effective in election campaigns but a catastrophe once in government! We must bring Italy back to Europe with France and Germany," Renzi tweeted on Wednesday, calling for a pro-EU coalition.

Mattarella will give PD and M5S until early next week to hammer out a coalition agreement, according to media reports.

With signs that a PD-M5S deal was possible, Salvini mocked his former coalition allies saying: "In a week they have gone from the League to Renzi".

"No matter which government emerges, its goals will be against the League," he said.